The Report Company

A promising investment destination

The Governor of the Central Bank believes that Sri Lanka is on the fast track to international recognition. But for South Asia's arguably most balanced and resilient economy, important challenges still lie ahead.

Historically, Sri Lanka served as an intercontinental trading centre between the West and Asia along the Silk Road. Unfortunately, in contemporary history, Sri Lanka has suffered under the brutality and violence of a 30-year conflict. But the 21st century finally brought peace for the people of Sri Lanka, with an end to the conflict in May 2009.

Although there is much to be rebuilt, Ajith Nivard Cabraal, Governor of the Central Bank of Sri Lanka, is very optimistic about the bright future that lies ahead of his country. He is on a mission to regain Sri Lanka's prestige as an international hub providing services throughout the region and the world.

Cabraal is a proud member of the team which first presented the blueprint for Sri Lanka's economic strategy in 2005. Under the leadership of President Mahinda Rajapaksa, the plan outlined strategies for conflict resolution, economic transition, and the social and political complications that can emerge in post-war nation building.

At the same time as facing the challenges of recovering from a decades-long civil conflict, Sri Lanka met with a world in the throes of a global recession. Nonetheless, the island nation has managed to sustain steady progress.

"We have experienced 8 percent economic growth for two years running. Inflation is in the mid-to-single digit range, which is what we aimed for. Unemployment has been reduced to 4.5 percent [and] infrastructure is growing. Our bonds were oversubscribed and are trading on-par or above, even in today's context of the worst of times," explained an enthusiastic Cabraal, who was integral to the sale of Sri Lankan bonds on the commercial markets.

However, there is much work to be done to restore Sri Lanka's reputation as a stable economy and secure investment destination. With this in mind, several targets must be achieved in the next 5-6 years; namely the reduction of poverty, sustaining near double digit growth, and doubling per capita income.

An ambitious agenda, but Cabraal is confident about the outlook for Sri Lanka's economic development. "Our per capita income is increasing at the fastest rate in the region," he said, "which proves that there is a new momentum in our economy."

Even the managing director of the World Bank was impressed with the current administration's dedication to Sri Lanka's future. Cabraal explained, "It was the first time she had ever seen a leader commit to a per-capita income in an election manifesto."

At present, Sri Lanka has a number of challenges to overcome. The current recessionary conditions in the US and EU, the two biggest markets for Sri Lankan products such as garments and tea, are expected to continue for the foreseeable future. An increasing trend towards protectionism is another potential threat to Sri Lanka's exports.

Furthermore, the recent political turmoil and instability in the Middle East and North Africa region - particularly in Egypt, Libya, and Syria - presents further risks to Sri Lanka's all-important tea industry.

Despite these difficulties, and given its natural geographic vantage point, Sri Lanka is poised to reposition its trading focus towards the lucrative markets of India, China and other Asian countries.

With an end to the conflict and the decreased risk for foreign investors, the Sri Lankan population now represents a previously untapped market with strong demand, as imports are rising at a faster rate than exports. Sri Lanka intends to concentrate its efforts on increasing foreign direct investment (FDI) flows, enhancing productivity, and improving the competitiveness of exports.

Sri Lanka has adopted a strategy not to replicate or transfer the activities and developments in the global economy to the local economy. The government's policy is to absorb some elements of the shock, so that its citizens and institutions will have time to adjust.

However, Cabraal takes issue with certain external factors which he sees as detrimental to Sri Lanka's post-war economic recovery. Despite an end to hostilities, a significant number of opponents to the ruling party in the diaspora routinely campaign against foreign investment and in favour of ratings downgrades, which may adversely affect further growth.

Notwithstanding this supposed external interference, Cabraal points out that Sri Lanka's private sector has continued to thrive. "At the time of the withdrawal of the [EU's] generalised system of preferences (GSP+) trade benefits, many thought the entire economy would collapse as a result. In fact, exports actually began to grow at a faster rate".

After decades of conflict, the Sri Lankan economy is poised to flourish, thanks to the local demand and entrepreneurial spirit of Sri Lankans who are eager to get their country back on its feet.

"We are open to investors from anywhere in the world," said Cabraal. Malaysia, India and China have already seen the potential and entered the local market, while American and European companies are the biggest investors in Sri Lanka's bond issues.

Cabraal exudes confidence. "I think we have shown that Sri Lanka is a powerhouse of energy. We believe that as a comparatively small nation in South Asia, we have the most balanced and resilient economy in the entire region."

As Governor of the Central Bank, Cabraal wants to send out an open invitation for investors to come early and seize prospects. There are ample amounts of potential investment opportunities in 21st century Sri Lanka, particularly in education, health services, fisheries, infrastructure, and tourism.

Within the framework of the current administration's roadmap for the future of the nation, Cabraal sees an enormous scope of endless possibilities. "We delivered what we promised, and ... brought prosperity to the country, which is a great feeling. I am pretty confident that we are a winning team [and] the President has given our team extraordinary leadership."

Sameera Tilakawardana is Consultant Director at the Department of Information of Sri Lanka’s Ministry of Mass Media